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Credit, Money and Macroeconomic Policy

Credit, Money and Macroeconomic Policy

A Post-Keynesian Approach

New Directions in Modern Economics series

Edited by Claude Gnos and Louis-Philippe Rochon

With recent turmoil in financial markets around the world, this unique and up-to-date book addresses a number of challenging issues regarding monetary policy, financial markets and macroeconomic policy.

Chapter 12: Fiscal Policy in the Macroeconomic Policy Mix: A Critique of the New Consensus Model and a Comparison of Macroeconomic Policies in France, Germany, the UK and Sweden from a Post-Keynesian Perspective

Eckhard Hein and Achim Truger

Subjects: economics and finance, post-keynesian economics


Eckhard Hein and Achim Truger* INTRODUCTION Mainstream macroeconomics today is dominated by new consensus models (NCMs). In these models, monetary policy applying the interest rate tool is able to stabilize output and employment in the short run, but in the long run it is neutral and only affects inflation. Fiscal policy is downgraded and is to support monetary policy in achieving price stability. Post-Keynesians have criticized these NCMs for a variety of reasons. Broadly summarized, the critique is related to the assumption of a stable long-run equilibrium ‘non accelerating inflation rate of unemployment’ (NAIRU) in the NCMs, determined exclusively by supply-side factors to which actual unemployment can be adjusted by means of monetary policy interventions, on the one hand, and to the assumption of the independence of this NAIRU from the development of actual unemployment determined by aggregate demand, and hence from monetary policies, on the other. Related to this critique of the basic NCM is a critique of the macroeconomic policy implications derived from this model. Besides questioning the ability of monetary policy to adjust actual unemployment to the NAIRU, the complete neglect of fiscal policies in the NCM has been criticized. And the NCM view on the role of wage formation and wage bargaining, demanding nominal and real wage flexibility by means of structural reforms in the labour market and decentralization of 235 M2537 - GNOS PRINT.indd 235 25/02/2011 14:26 236 Credit, money and macroeconomic policy wage bargaining in the case of persistent unemployment, has been under...

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